Cairn India Q3 Earnings Review

Oil & Gas exploration company Cairn India has reported a decent 12.5 per cent (yoy) rise in its consolidated net profits for the December quarter of the year 2011, despite stagnant growth in the topline. The company’s net profit now stands at Rs 2261.93 crore as compared to Rs 2010.12 crore during the Dec 2010 quarter.

The spurt in bottomline can be attributed to higher other income and forex gain components. While other income rose sharply by 228 per cent (yoy) to Rs 112.35 crore from Rs 34.16 crore, forex gains for Q3 stood at Rs 301.47 crore as against nil in the previous year same period. Another surprise factor of its Q3 earnings were a 67 per cent fall seen in the interest cost which now stands at Rs 24.01 crore as against Rs 74.22 crore in the year ago period. Consequently EBIDTA margins and PAT margins have improved by 670 bps and 810 bps on a yoy basis to 89.9 per cent and 73 per cent respectively.

On the topline front, the company has seen a stagnant growth as production from all its functioning fields fell by 1.3 per cent in the month of December on a yearly basis. Revenues were also impacted by additional burden from royalty payment to the tune of Rs 628.52 crore and profit petroleum burden of Rs 572.7 crore payable to the government. Going forward company foresees an uptick in its production, which would get a fillip from the recent commissioning of its Bhagyam field in the Rajasthan Block capable of producing 40000 bpd of oil. Management seems pretty confident of achieving its year end target of 175000 bpd of oil.

Moving on, Cairn’s average price realizations on oil stood at USD 101.1 per barrel, 33 per cent higher on a yoy basis but marginally lower by 1.7 per cent on a sequential basis. A positive factor that benefited the company was that the discount to Brent crude this quarter was lower at 8.3 per cent against an average of 12-16 per cent earlier. Average price realization on gas has remained stagnant throughout the years at around USD 4.4-4.5 per barrel levels.

In conclusion, Cairn continues to remain a debt-free company backed by a mammoth cash reserve of Rs 6460.2 crore as on 31st Dec 2011, which is 4.8x its debt of Rs 1350 crore Sept 30th 2011. Cash flow from operations currently stands at Rs 2135.3 crore, translating into a share value of Rs 11.2 per share. Add to this the fact that Cairn is the only company in the oil & gas exploration space which does not have to share the burden of subsidy unlike its peers – ONGC and OIL who in the current scenario find themselves in a clueless spot regarding the final subsidy share to compensate the PSU oil marketers for their losses. The final nod from the cabinet towards the proposed acquisition by Vedanta will also prove as a positve factor going forward.

At CMP of Rs 351.75 the counter is available at PE of 8.15x trailing 12-M EPS of Rs 43.16, at a fair discount to its peers like ONGC and Oil India which are available at PE multiple of 12.45 and 9.95 respectively. However, our projected annualized EPS of Rs 40.3 discounts the counter at 8.72x which signifies hardly any further headroom for price appreciation.